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Summary:

No operational improvement on the horizon, Maintain Sell ABB Ltd (ABB) reported revenue of Rs. 17.9bn in 3QCY12 (3.5% yoy growth). EBITDA margin of 2.5% (yoy decrease of 41bps) was below our expectation of 4.7% due to margin pressure & cost over runs in power systems & process automation segments. Impact of weak margins and forex loss of Rs. 300mn during the quarter was partially mitigated by change in accounting policy for embedded derivatives for CY12 which boosted PBT by Rs. 130mn (for 9MCY12). While the company’s efforts to improve internal efficiencies and indigenization in manufacturing has resulted in raw material costs getting reduced from to ~71% in 9MCY12, segmental margins have continued to remain subdued due to execution of low margin orders. Order inflow during the quarter stood at Rs. 16.7bn, de-growing by 32% yoy primarily due to delay in finalization of large orders in spite of ABB being L1 in a few orders. While the management is optimistic of securing new orders from select sector like cement, solar and transmission orders, order inflow is not expected to pick up in the near term due to delays in new projects in the power sector and weak industrial capex. Considering the muted demand environment and delays in payments, the management is laying more emphasis on payment recovery and margin improvement (through cost control) over growth. We expect growth and margins to remain under pressure and improve only gradually. At 45.8x CY13E earnings, the stock continues to remain expensive. With no significant improvement in operational performance in sight, we reiterate our Sell rating on the stock. Highlights of the quarter’s performance and outlook Execution pace remains stunted – Weak pace of execution (3.5% yoy growth) continued for the fourth consecutive quarter with revenue growth remaining muted across all segments except the process automation segment (12.8% growth). Client side and project related delays continue to plague both power and automation segments owing to which we expect revenue growth to be muted at 8% in CY12E and pick up moderately to 15% yoy in CY13E Cost overruns keep margins suppressed – Margin pressure continued to prevail with both power systems and process automation segments registering losses due to execution delays and cost over runs in a few projects. While the management is aiming at improving margins through process improvement and internal cost efficiencies, we expect margin recovery to be only gradual and expect EBITDA margin of 4.6% & 6.7% in CY12E & CY13E Base orders keeping order inflow at acceptable levels – While large orders have remained elusive leading to order inflow de-growth of 32% yoy in 3QCY12, base orders which constituted ~80% of order inflow this quarter have kept order inflow pace at an acceptable level on an absolute basis

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